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A Cryptocurrency Primer: Is Bitcoin a Good Investment?

In the realm of economics, there are plenty of terms that might confuse the layperson, but most of us probably know what the word "money" means. "Cryptocurrency," by contrast, can be baffling. It's money, but not government-backed money? It gets mined almost magically by a process that does nothing else of value? How does that work?

Given the level of investor interest in cryptocurrencies, for this episode of Motley Fool Answers, Alison Southwick and Robert Brokamp brought in Motley Fool analyst Aaron Bush to give their listeners the lowdown. In this segment, they try to answer a question many Foolish investors have: Should I invest in bitcoin now, wait for its price to drop, or simply avoid it like the plague?

A full transcript follows the video.

This video was recorded on Nov. 21, 2017.

Alison Southwick: Bitcoin as an investment idea. Wall Street has definitely, in the last few months, started to talk about bitcoin and dip their toes in. Jamie Dimon over at J.P. Morgan is quoted as saying bitcoin will eventually blow up. It's a fraud. It's worse than tulip bulbs and it won't end well. He also said that he would fire any trader for trading bitcoin just for being stupid.

On the other side, other Wall Street figures [for example, Goldman Sachs CEO Lloyd Blankfein] said he had a level of discomfort with bitcoin, as I have a level of discomfort with anything that is new. I thought, "Well, that's keeping your options open." And then I also read this other great quote in an article in The New York Times (about a guy who invests in cryptocurrencies, digital currencies, and assets. That's his full-time job. He was talking about bitcoin and whether or not it was a bubble. He said, "If my landscaper ever asks me about crypto, that's the day I get out."

I feel like we're very close to that day, but maybe not. Like I said, we've got a 22-year-old family member who wants to get into bitcoin without any idea of what that even means. Bitcoin. Speculation? Bubble? What are your thoughts?

Aaron Bush: It is absolutely speculative, and the whole cryptocurrency market beyond bitcoin is also very speculative. That said, the technology that underpins everything is very real. It's very real for what blockchains can do outside of cryptocurrency, but I also think it is very real for what cryptocurrencies can be in the future.

In my opinion, this is classic hype cycle, where we've seen this several times before across history. The internet bubble was the last big example of something like this. All of these companies are rushing to sell tokens instead of stocks, and a lot of companies are putting blockchain in their titles. That's very similar to companies who used to put .com in their names before. I do think there are a lot of similarities with there being hype, so investors absolutely need to be careful.

This also is a very small asset class. It's brand new, and because the technology running it is very real, I personally do believe it will be significantly larger over time as new applications are found, but it's probably going to be a very rocky road getting there.

Southwick: I saw that only 2% of Americans own or have ever owned bitcoin, and it's a limited quantity. There's only ever going to be so much bitcoin in the world.

Bush: There's only going to be 21 [million] bitcoin total, and I do understand the sentiment of when everyone suddenly becomes interested, it makes sense to be a little skeptical; but at the same time, I think there's something like 11 or 12 million millionaires in the U.S., and there's only enough bitcoin, in total, as the end goal essentially for bitcoin, that they can't even own two of them, and the market cap is about $120 billion.

So, even if this just becomes a small piece of a lot more people's portfolios, which really isn't that much out of the question, this can be worth so much more.

Southwick: So, don't focus on the immediate bitcoin and what people are freaking out about right now. What are you focusing on? What are you looking at as an investor, not a speculator?

Bush: I'll disclose I actually do own some bitcoin.

Southwick: When did you buy it?

Bush: I bought in early 2017. It was just more about being interested in it. I wanted to learn more about it. But I've been following it for a while. I also own some Ethereum, which is the second-largest cryptocurrency.

My approach for investing is I'm willing to invest very small percentages of my portfolio -- less than 1% of my portfolio -- in order to learn more about this. I recognize that the upside is significantly larger than the downside, potentially. What I'm really looking for are the next hundred billion-dollar ideas. Trillion-dollar ideas. I'm not just jumping around buying a bunch of different things.

I'm taking a very slow and measured approach to figure out which ideas stick, because at the end of the day this is not investing in stocks. This is closer to venture investing. This is more like seed-stage investing because many of these new cryptocurrencies, when you buy them, actually don't function, yet. I do think it's good to take it slow. That's what I'm doing personally, but I also am taking a very open-minded approach and trying to surf the learning curve. Trying to stay on the very steep end of things so that I can spot these opportunities before they turn into something much bigger.

Southwick: We have a friend who, as a lark, bought a bitcoin for $50.

Bush: Nice.

Southwick: What did we say? Today bitcoin is like $7,500? $7,600? What is it today?

Bush: It's about $7,500. That's not a bad investment.

Southwick: That's why everyone wants it, but he bought it a really long time ago just for the heck of it because he's a tech-savvy kind of guy. He never expected this to happen, but he's going to hold onto it for a very long time and see where it takes him.

Bush: That's awesome. I do think people should be very open-minded about this. I think just it being something new and something hype makes it easy to laugh at, but I haven't met anybody who's dug into this that became a skeptic. Everyone who digs into this becomes far more optimistic and I think that's pretty telling.

Southwick: Now when you say digs into it, you're talking more specifically around...

Bush: Understanding the technology, understanding how essentially the monetary system of this works, and understanding where it can go from here.

Southwick: I think it's possible I'll pay for my lack of vision one day, but I think this isn't for me. That's OK, though.